THIS REPORT CONTAINS ASSESSMENTS OF COMMODITY AND TRADE ISSUES MADE BY USDA STAFF AND NOT NECESSARILY STATEMENTS OF OFFICIAL U.S.

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1 THIS REPORT CONTAINS ASSESSMENTS OF COMMODITY AND TRADE ISSUES MADE BY USDA STAFF AND NOT NECESSARILY STATEMENTS OF OFFICIAL U.S. GOVERNMENT POLICY Required Report - public distribution Date: GAIN Report Number: TH2033 4/2/2012 Thailand Cotton and Products Annual 2012 Approved By: Orestes Vasquez Agricultural Attaché Prepared By: Ponnarong Prasertsri Agricultural Specialist Report Highlights: TH2033 MY2011/12 cotton imports will likely decline percent from the previous year to 1.3 million bales in anticipation of a global economic slowdown. In addition, the widespread flooding in the last quarter of 2011 affected the textile industry, particularly spinners, as many companies closed down their facilities. However, a recovery is expected in MY2012/13 which will increase import demand by percent to 1.6 million bales from MY2011/12.

2 Executive Summary: MY2010/11 and MY2011/12 cotton import demand plummeted due to a spike in world cotton prices and an economic slowdown domestically and internationally, and widespread flooding in the last quarter of Cotton imports dropped 3.0 percent in MY2010/11 and will likely decline further by percent in MY2011/12 to 1.3 million bales. The spike in world cotton prices hit record highs in mid resulting in a reduction of MY2010/11 cotton yarn production of around 3.0 percent from the previous year. The flooding affected around 4.0 percent of total textile industry. However, spinners bore the brunt of the flooding as 20 percent of their facilities had to close down production. Consequently, in the first half of MY2011/12, total capacity utilization of cotton-fiber spinning mills declined to 51.0 percent of total capacity utilization, down 31.0 percent from the same period in the previous year. In MY2012/13 cotton yarn production recovery is expected as such cotton imports will increase to 1.6 million bales, up percent from the previous year. Additionally, U.S. cotton exports will also increase 20 percent to 0.6 million bales, after decreasing significantly by 32 percent in MY2011/2012 from MY2010/2011. Commodities: Cotton Author Defined: Section 1: Situation and Outlook for Upland and Value-Added Cotton 1. Production Cotton production is insignificant in Thailand, providing less than one percent of total demand. In MY2012/13 cotton production will likely continue its downward trend as acreage is reduced due to unattractive returns compared to alternative crops, particularly sugarcane and tapioca (Figure 1). Planted area will decline to 9,300 rai (1,488 hectares), down 2.0 percent from the previous year, with anticipated seed cotton production of 1,700 tons. The Government s ban on transgenic plants remains in place, effectively eschewing an alternative that could increase returns. In addition, unlike tapioca or rice, the Government does not have domestic support programs for cotton farmers.

3 2. Consumption and Marketing MY2011/12 cotton consumption will continue to decline significantly by approximately 20.0 percent to million bales from the previous year due to domestic and global shocks. In 2011, world GDP slowed down to a growth of 3.3 percent, as compared to a 4.9 percent growth in The US, which accounts for 20 percent of total Thai textile and clothing exports, also slowed down to 1.7 percent GDP growth in 2011, as compared to a 3.0 percent GDP growth in the previous year. The Thai economy was adversely affected by the widespread flooding in the last quarter of 2011, which resulted in a 9.0 percent contraction in the fourth quarter GDP (Figure 4). Consequently, the overall GDP growth slowed down to a 0.1 percent in 2011, as compared to 7.8 percent growth in This led to a decline in domestic consumption of non-durable goods of non-food items of 1.9 percent in the fourth quarter of According to the Thai Textile Institute s flood assessment, around 170 factories were shut down during the flooding of which 18.0 percent were spinners, 9.0 percent weavers, 12.0 percent home-textile manufacturers, and 40.0 percent garment manufacturers. These enterprises accounted for 4.0 percent of the total textile industry. However, 20 percent of the spinning mills had to shut down operations. Among them was a large synthetic fiber manufacturer whose production accounts for percent of Thailand s total synthetic fiber production. On the other hand, 3 percent of all weaving and garment facilities suspended operations. Consequently, total capacity utilization of cotton-fiber spinning mills dropped to around 45.0 percent in the fourth quarter of 2011, down 21.0 percent from the previous quarter. In the first half of MY2011/12, total capacity utilization of cotton-fiber spinning mills declined to 51.0 percent of total capacity utilization, down 31.0 percent from the same period in the previous year as the flooding aftermath lingered and was accentuated by the global economic slowdown. Also, capacity utilization of the synthetic-fiber industry declined approximately 50.0 percent. The full recovery of the spinning mills is unlikely until MY2012/13. In addition, the textile industry, particularly the labor-intensive garment industry, will likely face higher production costs as the minimum wage will increase to 300 baht/day, up 43.0 percent from 210 baht/day, effective on April This increase will affect the export competitiveness of garment

4 manufacturers as labor cost accounts for around 20.0 percent of the total costs. The Thai Garment Manufacturers Association expect that the minimum wage increase will result in a 3-6 percent increase in garment production cost. Also, the increase will hasten the urge of large garment manufacturers to relocate their facilities to neighboring countries particularly Laos, Cambodia, and Vietnam where the labor costs are three times lower. MY2010/11 cotton consumption declined around 3.0 percent from the previous year. The main drivers of the decline in consumption were the record cotton prices in 2011 due to low inventories. Spinners reduced their total capacity utilization to around 69.0 percent, down 4.7 percent from the previous year. As such, production of cotton yarn declined in the second half of the year (Figure 2). In addition, domestic sales of cotton yarn dropped by 17.0 percent in MY2010/11, particularly in the second half of the year when sales declined 27.5 percent from the same period in the previous year. Weavers also cut their capacity utilization by 4.2 percent in the second half of the year due to tight supplies of cotton yarn and a slowdown in enquiries, as compared to a 3.6 percent increase in their production capacity in the first half of the year. Consequently, their cotton fabric production increased slightly by 0.5 percent, much lower than its MY2009/2010 production growth of 10.0 percent. Meanwhile, polyester yarn production increased 10.0 percent from the previous year as textile manufacturers increased the polyester proportion in the polyester-cotton blends to lower their weaving costs. Overall for CY 2010, the market share of man-made fiber increased to nearly 60.0 percent of total fiber consumption, as compared to 53.0 percent over the past five years (Figure 3).

5 MY2012/13 cotton consumption is forecast to increase to million bales, up 16.0 percent from the previous year, in anticipation of the recovery of the spinning mills. The spinners who were affected by the 2011 flooding expect to rehabilitate their factories during the first half of MY2012/13. Consequently, their capacity utilization will likely increase to an average of 70 percent from 51 percent in the previous year, driven by an anticipated strong domestic economic recovery in 2012, as GDP is forecasted to grow by percent. 3. Trade MY2011/12 cotton imports will likely continue to decline to 1.3 million bales, down 26.0 percent from the previous year, as spinners retain large inventories of raw cotton purchased at record highs. As prices started plummeting, most spinners have been negotiating with their shippers to delay the shipments of forward contracts purchased at record prices while some of them are reportedly cancelling contracts. To curtail their losses, spinners are also limiting their purchases to cheap cotton for immediate need only, particularly from India, to blend with their carry-over stocks. This has had the effect of significantly increasing imports of Indian raw cotton to approximately 50,000 bales in the first half of MY2011/12,

6 up 15.0 percent from the same period in the previous year, while imports of U.S. raw cotton declined to around 80,360 bales, down 67.5 percent from 247,100 bales for the same period. Overall, U.S. cotton imports are expected to decline to 0.5 million bales, down approximately 32.0 percent from the previous year. MY2010/11 cotton imports declined to 1.7 million bales, down 3.0 percent from the previous year, due to high cotton prices driven by tight global cotton supplies and strong import demand from China. Average import prices of raw cotton soared to a record $2.0/lb in July 2011, as compared to an average of around $0.7/lb during MY2008/09 MY2009/10 (Figure 5). Spinners reduced their average capacity utilization by 4.7 percent from the previous year. However, import of U.S. cotton increased to 735,987 bales, up 12.2 percent from the previous year, due to limited exportable supplies from other exporting countries. U.S. cotton s market share increased to 42 percent, as compared to 36 percent in the previous year. MY2012/13 cotton imports are forecast to increase to 1.6 million bales, up 23.0 percent from the previous year, in anticipation of the recovery of the textile industry and stable world cotton prices. The spinners, who were affected by the flooding in 2011, expect a full recovery of their production capabilities in the second half of MY2012/13. U.S. cotton imports will likely increase to 0.6 million bales, up 20.0 percent from the previous year. Thailand also exports cotton in form of comber waste, a by-product of spinning medium count yarn (#30 s - #40 s). Exports of raw cotton from comber waste will likely be insignificant at 1,000 bales in MY2011/12 due to a reduction in cotton yarn production. The exports are expected to increase to around 3,000 bales in MY2012/13 in anticipation of a recovery in cotton yarn production. 4. Stocks MY2011/12 cotton stocks are expected to decline to 253,000 bales, down 22.0 percent from the previous year as spinners will likely run down their inventory as they will limit their purchases only for immediate needs as they are facing liquidity concerns due to last year s run-up in prices. They have also negotiated with shippers to delay the shipments of their forward buying contracts until MY2012/13

7 as the contracts were made last year at the record highs. Moreover, they still hold large portion of cotton yarn stocks of which approximately percent are high-cost cotton yarn due to the downturn in textile and garment industry following the domestic and global economic slowdown. MY2012/13 cotton stocks are forecast to increase to 268,000 bales, up 6.0 percent from the previous year. The stocks will likely be at normal levels which are around two months use. Section 2: Statistic Tables Table 1: Thailand's Production, Supply and Demand for Raw Cotton Cotton Thailand 2010/ / /2013 Market Year Begin: Aug 2010 Market Year Begin: Aug 2011 Market Year Begin: Aug 2012 USDA New USDA New USDA New Official Post Official Post Official Post Area Planted (1000 HA) Area Harvested (1000 HA) Beginning Stocks lb. Production lb. Imports 1,752 1,755 1,300 1,300 1, lb. MY Imports from U.S lb. Total Supply 2,048 2,051 1,626 1,629 1, lb. Exports lb. Use 1,700 1,700 1,350 1,350 1, lb. Loss lb. Total Dom. Cons. 1,725 1,725 1,375 1,375 1, lb. Ending Stocks lb. Total Distribution 2,048 2,051 1,626 1,629 1, lb. Stock to Use % (PERCENT) Yield (KG/HA)

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13 End of report

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